Update 219: Who is Jay Powell?

A look at Trump’s Choice to Head the Fed

Yesterday, President Trump announced Jerome Powell as his nominee to serve as the next Chair of the Federal Reserve Board.  The reality is, Trump probably could easily have picked Janet Yellen, who has directed Fed policy as closely to  what Trump would want as any other candidate for the post.   But Trump said Yellen’s very incumbency was a disadvantage — he wanted to “make his mark.”

So Trump, believing he is there to make a difference, picked another candidate who represents policy continuity with the current Obama-era Fed Chair.  Powell, among Fed’s reliable accommodative policy exponents, has dissented from the Yellen majority with rare exception.

Beyond the Fed record, who is the nominee?  What is his academic and professional background?  What might his stewardship of the Fed mean for policy the economy?  How would the Senate approach his nomination?  See below.

Good weekends, all.

Best,

Dana

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Jay Powell – An Unconventional Road to the Fed

Powell would be the first Fed chair since 1979 not to hold a PhD. in economics.  His professional background is in law and investment banking. More of a practitioner than an academic, Powell has worn a number of hats in the policy world nonetheless.

Career Overview

Powell’s career began in politics, where he worked as a Legislative Assistant to Senator Richard Schweiker of Pennsylvania in the 1970s. After law school, he clerked for Judge Ellsworth Van Graafieland before transitioning to private practice.  Powell moved into investment banking at Dillon, Read, & Co. in 1984.  In 1990, he returned to public service as the Undersecretary of the Treasury for Domestic Finance under George H.W. Bush, where he was involved with investigating and sanctioning Solomon Brothers.

From 1997 until 2005, Powell worked at The Carlyle Group, a well-known Republican-connected private equity firm that gained notoriety during the leveraged buyout fervor of the 1990s.  He headed the industrial group within the company’s buyout fund. Powell would be the first investment banker to chair the Fed and would  be the wealthiest Fed chair in recent history.

Personal Activism

The nominee is notable for his activism in a variety of areas.  In 2008, he became managing partner for the Global Environment Fund, a finance company that focused on investing in sustainable energy.  He also sits on the board of The Nature Conservancy of Washington, D.C. and Maryland.   He currently serves ad a member of the board of directors of D.C. Prep, a charter school operator in Washington, D.C., and is a founding chair of the Center City Consortium, a group of 16 parochial schools in the D.C. areas which caters to underprivileged students.

Pre-Fed Years

One interesting highlight from the nominee’s policy past is his term at the Bipartisan Policy Center from 2010 to 2012.  As a visiting scholar, he worked on getting Congress to raise the debt ceiling during the debt-ceiling crisis of 2011, (taking home a $1 annual salary).  His avocational interest and extensive background in fiscal policy is notable for someone who will instead direct monetary policy.  Finally, Powell is a member of   the Board of The Bendheim Center for Finance at Princeton University, a Ben Bernanke initiative.

Monetary Policy

Interest Rates

As the Fed Chair, Powell would present a “centrist” approach to monetary policy.  He often voted with the board to maintain a near-zero interest rate environment in order to aid recovery efforts during his term.  A close colleague of the current Chair, Janet Yellen, Powell would maintain the current policy course of gradual rate hikes to sustain steady economic expansion and falling unemployment.

Balance Sheet Normalization

Powell, who also voted in favor of quantitative easing, may support a faster rate of normalization than Chair Yellen. It is also possible that he would be relatively less inclined to use quantitative easing in the event of future slumps.   Like Yellen, Powell would hold the neutral interest rate at 2.75 percent before inflation for the foreseeable future.

Supervisory and Regulatory Policy

As stated, Powell’s approach to regulatory reform will differ from his predecessor. Powell currently heads the Committee on Supervision and Regulation and although he has voted in favor of every action taken by the Fed since joining in 2012, he has expressed genuine concerns over the cost of certain regulations.

Specifically, Powell supports tailoring:

• The Volcker Rule for small and medium-sized banks.  Powell argues the Volcker rule should apply to a narrower range of large institutions and that the rule currently introduces unnecessary burdens for smaller banks.

• Stress Testing for small and medium-sized banks: In the past, Powell has argued the qualitative component of stress tests should be removed.  He has also called for more “transparency” in stress testing, a proposal that alarms some progressives.

Despite these concerns, Powell supports the Dodd-Frank Act’s basic structure.  He praised the success of Dodd-Frank in a recent speech and called for the application of lessons learned from banking reform to regulation of the housing market.  In the speech, Powell celebrated the strength and safety of our largest banking institutions, praising the following as evidence taxpayers won’t be on the hook in a future crisis:

“Common equity capital held by the eight U.S. global systemically important banks has more than doubled to $825 billion from about $300 billion before the crisis…  After the crisis revealed significant underlying liquidity vulnerabilities, these institutions now hold $2.3 trillion in high-quality liquid assets, or 25 percent of their total assets.  Under rigorous annual stress tests, they must demonstrate a high level of understanding of their risks and the ability to manage them, and must survive severely adverse economic scenarios with high levels of post-stress capital.”

Getting Confirmed

These policy views will be irrelevant if Powell cannot make it through the confirmation process, but recent history and a distracted Senate make his confirmation all but certain by a wide margin. Most significantly, the Senate has already confirmed Powell for a seat on the Board of Governors in 2012 and again in 2014.

In 2012, he was confirmed 74-21 to fill an unexpired term.  He was nominated in a bipartisan arrangement as the Republican nominee so President Obama could get Democrat Jeremy Stein confirmed.  In 2014, Powell was confirmed 67-24 for a full 14-year term. He earned no Democratic Nay’s and sixteen Yea’s from Republicans, ten of whom are still in the Senate.

The question regarding his confirmation is more when than whether.